Your Money.

Mutual Fund Industry Becomes A Growing Concern

So far this year, investors have bought more than $110 billion worth of mutual funds, helping push assets in the professionally managed investment pools to a record $1.7 trillion.

Do all those investors know what they're buying?

In the first half of last year, banks sold 14 percent of all mutual funds marketed, whereas just a few years earlier banks sold hardly any.

Do all those bankers know what they're selling?

Since Jan. 1, at least 235 new mutual funds have been created to accept money from the public-more than one a day, including weekends.

Do all those managers know what they're doing?

Do all these questions make you nervous?

Assets in mutual funds have grown roughly 1,200 percent since 1980, when they had $135 million in assets. And that's not just because stock prices have risen. The number of accounts has jumped from 12.1 million in 1980 to 77.2 million by 1992.

But this hypergrowth has many people fretting.

Consumers in a maze

Howard Schneider, vice president for the American Association of Retired Persons' family of mutual funds, confides that roughly half of his customers, who are age 50 and older, have never owned a mutual fund before investing in one of seven AARP funds.

"Consumers are wandering around in an investment maze," said Kent Brunette, the AARP's chief lobbyist for financial services.

Industry experts are concerned that, even though that $1.7 trillion in mutual funds was split almost evenly among bond funds (37 percent), money market funds (32) and stock funds (31) as of April 30, individual investors have not diversified as much as they should have.

"From the negative standpoint, people trying to do it themselves are not doing the type of research they should do," said Kim Dignum, a financial planner in Ft. Worth.

"They'll see the top fund last year and go into it when it's high and sell when it's low," she said.

Dignum gets some support from one of the biggest fund managers in the nation, John Bogle, chairman of Vanguard. In a recent speech in Philadelphia, Bogle said the industry must dispel myths about itself that if uncorrected could tarnish a shining image. One myth, he said, is that funds that were successful in the past will be successful in the future.

"The `past is prologue' thesis finds its highest and most obvious manifestation in the `search for No. 1'-the best-performing mutual fund," Bogle said. "No. 1 advertising is successful: It brings in assets, those assets bring in fees, and those fees bring in profits to the management. But the fact is that the subliminal suggestion that No. 1 in the past means No. 1 in the future is, well, balderdash. Worse, the sponsors of the ads know it."

Russ Condello, a certified public accountant in Ft. Worth, believes that investors generally are investing wisely-to a limit.

"I think it's good judgment, based on the alternatives available," he said. "People moving bank CDs have thought very hard before moving their money. They're very skeptical."

The problem, he said, is that "they don't actually do a full financial plan." When savers decided to move out of CDs, he said, they tend to move lots of money.

"There's such a large amount of dollars that the sheer weight of the elephant means there's the potential of overbuying" any single investment, Condello said.

Concerns voiced

"Generally, we're concerned about consumers getting steered to unusual products. And we're troubled by banks offering lookalike funds" that bear part of the bank's name in the fund's name, said Brunette, the AARP lobbyist.

Mike Bartlett, senior vice president of investment services for Comerica Bank Texas, said those fears are groundless.

"Any brochure at the bank must carry a disclaimer" that mutual funds and other products sold by the bank are not FDIC-insured and not guaranteed by the bank, Bartlett said.

Another pending change in mutual fund marketing also has sparked concern.

The Securities and Exchange Commission is soliciting public comment on a proposal to allow investors to purchase a fund based solely on an advertisement. The investor later would be mailed the fund's prospectus-an information-dense disclosure document. Now, investors must receive the prospectus before they may purchase the fund.

Still, despite the concerns being raised, "given the size of the mutual fund market, it's been surprisingly free of abuses," said Barbara Roper, who follows financial services for the National Consumer Federation.